patrick.net

I don't think anyone would dispute that people are living much more lavishly these days. What concerns me is the lack of saving that is going on. Large numbers of people are relying on their homes to end up funding their retirement, and I'm just not sure how realistic that's going to end up being.

If you pay off your mortgage before you retire, then your cost of living will be much lower. There will be some wealth effect for those who sell at that point and move to a lower cost area. People who think their homes will simply make them rich are deluding themselves.

Large numbers of people are relying on their homes to end up funding their retirement, and I’m just not sure how realistic that’s going to end up being.

Many people counted on the NASDAQ to fund their early (35 yr old) retirements as late as April 2000. I talked to some... wanted to laugh... but felt sad instead.

Peter,
I sincerely apologize for any snips (you know) earlier (a month or two ago). Didn’t mean to cause any harm.
Your comments are appreciated.
Hymie

Please explain. You are confusing me now. :)

I guess it's the nature of bubbles to fuel unrealistic expectations.

Fifty years ago the middle class lived at a level that is not much better than what would be considered the poverty level today.

Living standards are really difficult to compare with technological changes. There are so many "indispensible" things (internet, A/C, airbags) that were not widely available in 1950.

I started my planning before I was out of college. The key is to spend less than you earn, and invest what you save. Then time is your ally.

Zephyr, many of my friends have the same "plan" too. However, some are planning their retirement using the "average historical return" of the broad equities market without considering that:

1. past result is no indictor of future performance
2. end result is path dependent even average return remains the same

I think technology is mostly evil. It speeds up the course of human history. However, since human civilization has a destruction tendency, technology will only speed up our demise.

I think technology is mostly evil. It speeds up the course of human history. However, since human civilization has a destruction tendency, technology will only speed up our demise.

I don't think technology is evil. The Roman empire showed us that humans can find a way to self destruct all too easily.

Sorry for going way out of topic. Back to housing...

Face Reality, you are right that a home can be a retirement tool because it is a significant asset and its value follows inflation. My only concern is that people have unrealistic expectations about homes. Some of my friends think that real estate can help them retire in their 30's and so they stretch every bit to get into as many houses as possible. I have a bad feeling about this...

Face

A home can fund a retirement if it is close to being paid off. But these days people are not staying in their homes the way they used to. People are a lot more transient than they used to be. With home prices going up, and people generally moving up into bigger houses, there is likely to end up being equity lost. If people bought a home and lived in the same home for 20 years or more the way they used to, then assuming the home would provide a large part of the retirement would be a lot more realistic.

Jack

Do you think it's two different groups of people that invested in the tech and RE booms?

I'm not arguing the existence of an echo boom, it's just that stats suggest it's not as big as the original boom. I do think there is an overlap with later boomers and the echo boomers as you suggest, and this will mitigate the effect of boomers selling out of the market- at least for a while. The funny thing is that this part of Zephyr's argument isn't what I primarily disagree with.

He states that we've seen the worst in housing corrections already. But I disagree. I don't think the major 'once in a cycle' downturn has occurred yet. If I'm not misunderstanding what he's said, he's used the late boomers and echo boom as an argument that there are enough people who will need housing in the near future to offset large scale selling off. My argument is that there is also large scale speculation in the market that is driving up prices and lately inventory as building has increased to meet demand. This doesn't even factor in all the other reasons (NAAVLP's and so on) that the housing market is shaky. I think Zephyr’s arguments are based on an “all things being equal” premise when comparing past market cycles to now. But I’m not sure that applies anymore.

But the tech and RE booms came so close together I thought it was essentially the same group of investors- at least initially- that fueled the furor.

Cheer up. Scheudenfreude isn’t everything, but it’ll help with some of the bitterness. If things get really bad, lets all buy a farm in the Willamette Valley together, grow barley and hops, and brew beer Good riddance to technology.

No bitterness. Just indifference. What is an echo boom anyway?

I think we may need to switch to duck-and-cover mode very soon. I have a strange feeling that the bust is coming sooner and sharper then I thought.

I do think that the uptrend will resume after this downturn though. Thanks Zephyr for providing a fresh prospective.

If people bought a home and lived in the same home for 20 years or more the way they used to, then assuming the home would provide a large part of the retirement would be a lot more realistic.

My argument is that there is also large scale speculation in the market that is driving up prices and lately inventory as building has increased to meet demand. This doesn’t even factor in all the other reasons (NAAVLP’s and so on) that the housing market is shaky. I think Zephyr’s arguments are based on an “all things being equal” premise when comparing past market cycles to now. But I’m not sure that applies anymore.

Bingo. SactQt, I think you've hit the nail on the head here. While I haven't been around as long as MerrillClient (or Zephyr?), I did live through the last RE boom/bust cycle here. I see qualitative and quantitative differences between this bubble and the last.

I don't have all the stats (Posse ?), but I can bet that (even though some of these loan products existed back then) use of "exotic" mortgage products is higher today than at the peak of the last cycle -- MUCH higher. I would also bet that a higher % of buyers today have shaky credit, and are using less collateral (down-payment) AND buying more homes on 100% credit than in any previous cycle. My guess is also that this RE bubble has spread much wider and is closer to being a truly "national" in scale than the one in the late 80s.

After tech and RE, what do you think will be the next boom? Do think there will be something else?

hymie, these are good questions, and topics we've visited in previous posts --and very hard to answer.

If the RE bubble "deflates" gently/slowly (i.e., without bankrupting large % of recent buyers and plunging the economy into recession), then the possibility of it spawning a new "echo" bubble is a good possibility. I am becoming increasingly pessimistic about that scenario's likelihood, given how long and far this one has taken us. I've seen estiamtes that say up to 50% of jobs created since the tech bubble implosion have been directly or indirectly related to RE (looking for the link). That is not a good harbinger for the economy.

I’ve seen estiamtes that say up to 50% of jobs created since the tech bubble implosion have been directly or indirectly related to RE (looking for the link).

Found it:
tinyurl.com/dereu

Meanwhile, of the 243,000 private payroll jobs added in the state in the past two years, 122,000 can be directly tied to the housing market, according to UCLA Anderson. "In short, a sector of the economy that makes up 10 percent of total private sector jobs is accounting for 70 percent of the total job gains."

I really don't know were the speculative boom will be --alernative/nuclear energy? Precious metals (generally a good hedge during recessions)? Foreclosures/repossessions? Tulip bulbs...? Who knows.

I'm not very good at reading tea leaves or speculating, so I just try to diversify, invest long-term in mutual funds with good PE ratios and low expenses, and hope for the best. I'd avoid any fund that's heavy on RE (REITs, bonds funds with lots of MBSs, etc.). Other than that, I don't have any brilliant advice --not a professional investor/broker.

After tech and RE, what do you think will be the next boom?

Oil and energy. I can envision that high gas price will make people wonder about investments in the oil industry, epecially oil field trusts. All it take is new stocks/trusts/etf/funds in the sector. The bubble will form.

SactoQt,

There are some costs associated with moving, but I don't see that as impacting equity all that much. I don't think it matters if it's one house owned for 20 years or 3 houses owned for 6-7 years each as long as the equity is transferred from one house to the next.

Also, if people move that often, then ARMs make perfect sense. That's one of the reasons why I don't consider those loan statistics as being all that alarming. Even IO loans are no big deal if people regularly pay more than the minimum payment. The available statistics don't tell us anything about that.

Other statistics which aren't all that interesting in my opinion are the ones about low savings. The problem is the narrow definition of savings. Some people (and I'm one of them) don't believe in having money sitting in bank accounts or in the stock market. If your money is invested in other assets (such as real estate and stock in privately held businesses), it is not counted as "savings", but that doesn't mean that you're not prepared for retirement, etc.

Times change and financial behavior changes with the times. Unfortunately, the statistics which are collected don't change accordingly, so we get a distorted picture. Yes, a lot of people have ARMs and IO loans, but what does this mean without information about how often they move and how much they're paying each month? Yes, a lot of people don't have much savings, but how much do they have in total assets?

Face Reality, you still imply a hidden assumption that equity will be positive whenever people choose to sell/move.

We are going in cycles because

* You think that ARM/IO loans are fine because people move frequently and their equity will be positive through appreciation.

* We think that their equity may not be positive at all times because the housing market is cyclical and that ARM/IO loans will worsen this particular cycle.

I do not know what you are trying to say.

Bio-Tech in this country? I think the regulations are too tough. In China, it is much easier to get to the "human testing" phase. We simply do not have to political will to get aggressive about anything that has a remote connection to bio-ethics.

I rather bet on boring conventional health care.

I have to add that we may have better technology in this country but it is ultimately a human problem. The market just does not seem to favor taking risks (including political, ethical risks) in breakthrough technologies. This is very sad. Technology leaps only when we have world wars and technology becomes necessary to kill. Sad.

Face

My thinking is that people who move a lot, as is the case more and more, typically move up into a bigger, more expensive house. There will be equity transferred to the new house, but since prices are going higher and higher, whatever equity you have is buying less and less.

Say you buy a house at $250,000 and sell at $400,000 (I'm ignoring all transaction costs, taxes and so on) you have $150,000 equity- great!
You then buy a $600,000 home and have to finance $450,000. Few years later you sell at $800,000 and now you have $350,000 equity- fantastic! But then you buy a $100,000,000 home and have to finance $650,000.

See the trend. Most people today are not downsizing when they move. And the market is driven by the assumption that home values will continue to climb. Say your last move was into that $100,000,000 home and the market declines. The house is now worth $800,000. Your equity presumably would now stand at $150,000. This assumes you haven’t taken any HELOC’s for home improvements or any other reason. Your equity is back to where it was when you sold the first house and you now have a much bigger payment. If you bought the house using a NAAVLP your payment is likely to get much bigger. You could cash out and downsize. But is that $150,000 you have now going to finance your retirement?

And since I’ve used really simplistic math and left out all the costs of moving and transaction fees, it’s a good bet whatever equity you had is now wiped out. I don’t agree that keeping all one’s “investments” in RE is a good idea right now. The market is too volatile to make it a sure bet.

I did leave out that you could sell your $100,000,000 home at $800,000 and buy a smaller home at say $500,000 and that would leave you with a decent chunck of change. But I'm still not sure that you'd be left with enough to fund a retirement without savings elsewhere, which was kind of the point of the whole argument in the first place. :)

Aaaaaaaaaaaaand. I'm getting really long winded today. I painted a really simplistic portrait of a favorable housing market (overall) and I only showed a 20% in the market at the end. I showed pretty straight equity gains without factoring in low payments on principal, varying interest rates and run-up's in other kinds of debt. I think overall, most people are not realizing strong gains in equity when they trade-up in markets like this.

and I only showed a 20% drop in the market at the end.

Proofread........

SactoQt,

If prices 20 years from now are lower than they are now, then you're right. However, I find that to be unlikely to happen, especially in desirable areas. That's one of the nice things about real estate in good areas. You may or may not make a killing, but you almost definitely won't lose your shirt in the long run. Nothing is impossible of course, but fearing the unlikely worst-case scenario leads to paralysis and sub-optimal results in the vast majority of cases.

By the way, I don't know why you think climbing the equity ladder is bad. Again, you're assuming a large persistent price fall eventually which is actually extremely unlikely to impact you in the long run.

Face Reality, why 20 years? I thought you said that people move every few years. Also, many people have resorted to HELL in order to finance fine things in life. They have basically transferred equity wealth into consumption. Can they weather the storm?

...resorted to HEL...

sorry.

SactoQt,

Clearly, you have to be somewhat smart about how you climb the ladder and not make a large short-term bet risking it all at the end. I don't think people are all that foolish based on what I see around me in the Bay Area. I'm actually often quite impressed by how adaptable people are and how they find smart new ways to take care of themselves and their families as the economy changes.

Peter P,

Even if you move every few years, you keep transferring your equity. What matters is what happens in 20 years when you need to use the equity for retirement. In general, real estate is a young person's game. As Zephyr says, make time your ally. It's a pity to spend all those years paralyzed in fear unless you have some damn good alternative game plan.

Really, it is amazing how many self-proclaimed house-rich millionaires that I know are completely blinded by greed with no regard to risk aversion. People do come up with creative ways to destroy themselves though.

Face Reality, I have to apologize for ranting.

You are right, make time your friend. I do have plans and I will be more than happy to take risks when the rewards justify them.

SactoQt,

I'm really sorry to hear what happened to your dad. Just imagine what would have happened if your parents hadn't had the house!

I'm extremely frustrated with the health care situation in this country, and I don't understand why there isn't a lot more pressure from the people about this unbearable situation. The costs are totally out of control, the insurance situation is completely inadequate, and people can too easily lose everything they have (including their lives). Things just seem to be getting worse all the time on this front.

SactoQt, I hope that your Dad will feel better.

Face

I shudder to think what would have happened without the house. But I should mention that my parents were BIG spenders in their day. They would go on month long vacations every year spending at least $20,000 every year. (seems appropriate to mention that on this thread) I nagged them for years to save at least some of that money, but it fell on deaf ears. My Dad is a gambler by nature, and I'm sorry to say the gambles never pay off; he has lost more money in fly-by-night deals it's a wonder my parents are still afloat. Yes, the equity in their home saved them from bankruptcy. But had they saved my Dad could retire. As it stands now, I don't know what the future will bring.

The insurance situation isn't as unfair as you might think. My Dad's been a chain smoker for 30 years. Tough to get full insurance coverage on a guaranteed bad bet. I love my Dad, but his excesses can drive me nuts. He has heart disease and diabetes. But trying to get him to eat right, exercise and not sneak cigarettes is an uphill battle. My Dad is the quintessential boomer.

SactoQt, Your dad has caring children though, which are not really typical any more. It is quite difficult to get someone to change his/her habbits. I cannot even get myself to eat right and excercise enough.

Thanks for your kind words Peter and Face. Peter, you are right about getting someone to change their ways-- tough to do. Eating right and exercising-- even tougher. ;)